1 A Rising China with Specific Reference to the ICT Industry
The economic rise of states is believed to be a process that is tightly linked to the emergence, maturation and decline of particular industrial sectors (Cumings 1984). The new economy, which increasingly depends on the latest ICT, provides an incredible opportunity for China to become an IT powerhouse in East Asia, not only in terms of China‘s large market, but also based on its gradually stronger innovative capabilities. Moreover, as one of the crucial parts of political power is technological capability, the ranking of political powers in a region is essentially determined by the technological hierarchy that is based on various technological capabilities. Thus, the rise of China, based on its tremendous development of ICT, embodies changes in the power relations in EARPNs; in other words, it exemplifies the key changes in the shape of the original flying geese paradigm.
China has grown rapidly and become the largest market in the world for advanced computers, telecommunications and consumer electronics and network infrastructures
(Luthje 2004: 4). A large labour force with low wages is one of the crucial factors for continuously expanding manufacturing in China. According to the Ministry of Industry and Information Technology (MII), the value of China‘s electronic information products has grown from USD 20 billion in 1999 to more than USD 85 billion in 2005, and its output of several categories of domestic electronic and information products has been ranked first in the world. As a result, China has become the world‘s second largest consumer electronics market after the US (MII 2005). End-user IT spending in China passed USD119 billion in 2005, which includes all ICT spending as reported by ICT providers (Popkin 2006). Though its penetration rate is low, China has strengthened its telecom industry phenomenally during this last decade. China now has the world‘s largest telecom network and the second largest number of Internet users, and may possibly become the largest Internet market in terms of users (Popkin 2006). It would not be unreasonable to conclude that China‘s domestic ICT industry will be much stronger in the future as China continues to upgrade its telecom infrastructure towards the global level of productivity in industrial output (Popkin 2006).
The network of the global electronics manufacturing services industry based on this Wintelist structure established an environment for East Asia to grow as the central region for advanced manufacturing, both in the production and the location of its headquarters (Luthje 2004: 4). China is usually regarded as an ideal country to which low-end, labour-intensive mass products manufacturing should transfer. However, by continuously upgrading its products portfolio, China has become an ideal place to mass produce products with high complexity and high standards of quality (Luthje 2004). The continuous upgrading of processes is also accompanied by steadily improving R&D capabilities. Several Chinese ICT companies, such as Huawei, ZTE, Lenovo and TCL,
have already taken their first steps in exploring the overseas market by relying on independent advanced ICT technologies (Luthje 2004: 7). Chapter Four will give examples in detail.
Compared with other East Asian countries, China has an advantageous position in a strategic role for an integrated upgrade in the ICT industry (Luthje 2004: 14). The ICT industry in China has received a significant amount of investment and favourable economic policies from all levels of the Chinese government (Popkin 2006). With government support, China shows great economic potential for continuous growth and rapid innovation in the ICT industry, while such significant economic potential is lacking in many developed countries (Luthje 2004). Moreover, the growing ICT R&D power helps China to establish a critical position both in East Asia and in the world. Supported by enormous investments and favourable policies and regulations on ICT R&D, China has been capable of setting independent standards, which will be key market access barriers for other countries that would like to enter China‘s market and gain a market share. This very important factor will be examined in detail in Chapter Three and Chapter Four. Once a standard becomes global, it suggests that the country having this standard would have an incomparable bargaining chip (ChinaDaily 2006; cite Stiglitz).The Chinese consider that only under such circumstances can countries enter the global bargaining game on a relatively equal basis (ChinaDaily 2006; cite Stiglitz).
As we can see, China has been making a systematic effort to develop and push indigenous technical standards: Time Division-Synchronous Code Division Multiple Access (3G TD-SCDMA); WLAN Authentication and Privacy Infrastructure (WAPI);
Internet Protocol Television (IPTV); and Advanced Audio-Video Coding/Decoding Standard (AVS). The Chinese central government has realized that economic leadership will be driven by technological capability rather than by natural resources power, though such power has deemed China as ‗the World‘s Factory‘ (see more in Chapter Three). The competition for international standards essentially implies a conflict over business profits among national enterprises and the competition of different countries‘ national strategies. As the Chinese central government officially announced, to develop indigenous technical standards should be regarded as a priority in China‘s national strategy, more details on which can be read in Chapter Three. All in all, the Chinese central government believes that having independent global standards will lead to a more important role in the world economy.
The EARPNs have been deepened by China‘s integration into the network. With the vitality and energy in China today, the dynamism of East Asian economies has been further intensified and economic interdependence within East Asia has been deepened (Gaulier, Lemoine et al. 2007: 45). It is worth pointing out the noticeable changes that occurred in the trade flows within East Asia after China entered the international production networks. As mentioned above, China made great achievements in its economic take-off during the process of economic ‗Reform and Open Door‘,11 which helped China become the centre of the East Asian manufacturing networks. The significance of trade between China and other East Asian countries shows a marked rise, and China has already become the centre of East Asian trade expansion. According to trade statistics (see Chapter Three), along with an increase in intra-regional trade, trade
11 In December 1978, the Central Committee of the Communist Party of China held an historic meeting in Beijing, at
which two important decisions were made. One was to open China‘s door to the outside world and the other, to invigorate the national economy through reform. As it turned out, the meeting marked a new page in the annals of China. Since then, China has embarked on a gradual switch from the planned economy to what we now call the socialist market economy. Retrieved from http://www.xinhuanet.com/politics/ggkf30zn/ on 16th August 2009
volume between other East Asian countries and China has markedly increased. Based on the statistics, one can see that China has been a key trading partner with other East Asian countries and seems poised to take over the leading position of Japan. The previous EARPNs, led by Japan, which were characterized by a vertical transfer of investments and technology seems to be shifting towards a regional model of ‗bamboo capitalism‘ or ‗parallel development‘ (Xing 2007).
As Japan successfully established overseas business networks, the economic development of China has mainly depended on the overseas business networks that are called ‗bamboo networks‘ (Weidenbaum 1996). Bamboo networks have contributed tremendously to the development and transition of China‘s economy, especially after China launched the ‗Reform and Open Door‘ policy. The members of bamboo networks are usually expatriates who left China for East Asian countries (the overwhelming majority of expatriates settled in these countries) or other regions in the world before 1949 and usually have established relatively mature businesses that are traditionally run by relatives. As they gradually grow in strength and expand to become conglomerate businesses, ‗close-knit and formidable business spheres‘ have also been formed among these entrepreneurs (Weidenbaum 1996: 45). After 1978, these entrepreneurs were the first who went to China, bringing giant investments and relatively mature overseas business networks. Especially in the initial period of ‗Reform and Open Door‘, along with the establishment of Special Economic Zones (SEZ) and High-tech Zones, in addition to a series of investor-friendly policies and regulations, expatriates of bamboo networks turned out to be a valuable part of the foreign investors. These expatriates have not only made a great contribution in promoting local economic development but also drove those SEZs and Hi-tech Zones become more integrated into overseas
networks that were established by expatriates before they entered China‘s markets. Overseas Chinese FDI further deepened China‘s integration in EARPNs and contributed to strengthening China‘s influence within the region.
Along with continuous flows of FDI, the key factor in building EARPNs are the horizontal networks of trade and capital, in which a large amount of economic interaction on parts, components and other intermediate products occurs all the time among countries that lie in different tiers of RPNs. This model is gradually replacing vertical division and hierarchical exchanges (Cheow 2004: 3-4).
2 Debates about the Nature of EARPNs
The EARPNs were considered to be crucial to East Asian inter-regional trade growth and the East Asian Miracle (Gill and Kharas 2007). In the last two decades, the RPNs developed at an unprecedented scale in East Asian economies, accelerated by vertical production chains extended across the region and throughout the world (Kimura and Mitsuyo Ando 2003). It is undeniable that all East Asian countries have been in effect tightly connected because of economic interdependence based on the flying geese paradigm. On the one hand, the path of development in countries of the region implied differences in labour costs and income levels. The complementarities among these countries offered considerable opportunities for economic interaction, including trade and FDI among nearby countries. On the other hand, geographic proximity brought low transport and trade costs and, to some extent, contributed to the growth of the EARPNs. Moreover, favourable policies including duty drawback and encouragement on export-oriented FDI should be regarded as the main stimulus for increasing the growth
of the EARPNs, which were believed to be ‗more extensive than other regions‘(Gill and Kharas 2007).
The EARPNs have been a substantial component of each country‘s economy in the region. Each country‘s manufacturing activities and trade can no longer be discussed without the networks (Ando and Kimura 2003). Almost all countries in each tier eventually came to specialize in manufacturing components and intermediate inputs for MNCs from countries at the higher tiers, such as Japan, Korea, Hong Kong, Taiwan, Singapore, or countries including the US and in Western Europe. Dynamic changes occurred in economic relations among leading and catch-up countries. In the meantime, relationships between different countries in a regional hierarchy tightened, because development transferred from one country to another (Hiley 1999). During the entire process, both relevant policies and markets played their respective roles, which made the process more stable and sustainable (Hiley 1999). Through such a circular process, a catch-up country can successfully industrialize and complete its industrial upgrade by continuously developing in an open market, when its external relations with leading countries continue in harmony (Hiley 1999: 81).
Geographically, the EARPNs have never been fixed and tangible networks. The emergence of the EARPNs is rooted in a special historical background, while their development is closely related to complicated international and regional economic and political relationships (as stressed in Chapter One). That will be further explained in Chapter Three. After the onset of the 1997 Asian Financial Crisis, a new regionalism emerged in East Asia. Both the rapidly changing external environment and the need for expanded intra-regional economic cooperation among the economies of East Asia
brought new elements to the interpretation of the emerging features of EARPNs.
Because of tremendous changes in ICT, it is possible for latecomers to quickly become new leaders; consequently, the original catching-up model by learning step by step and vertical transfer does not work in East Asia, particularly in the ICT industry (Tung 2003). Along with the changes of industrialization in every country, the proportion of manufacturing gradually decreased in the countries that have completed industrialization and been located to the second tier of the production networks. These countries, such as the Four Dragons that usually served as a ‗transfer station‘ that transferred incompetent sectors or industries to China and other ASEAN countries while absorbing competent sectors, industries and technologies from Japan, started to gain the advanced sectors, industries and technologies directly from the US and European countries. Meanwhile, the Four Dragons were concentrating on specific industries or sectors that would help them become more independent. The Four Dragons gradually became more like service centres for China and other ASEAN countries (Shen 2001; Dai 2003). With the strengthening of the ICT industry, the original production networks within East Asia transferred to production networks that were directly linked to the rest of the world.
China, as a country that was deficiently behind the average economic development level of the world, did not follow the steps of the Four Dragons, but directly learned from the experiences of these countries and Japan, the US and Western Europe. By learning from other countries, China comparatively took a shorter period of time of 30 years to achieve the second tier or a higher tier in the EARPNs. It became widely known that ‗A panda breaks rank of Flying Geese Paradigm by manufacturing low-end products and
high-end products simultaneously‘ (Economist 2001).
After successfully transforming from being a ‗big power of manufacturing‘ to a ‗big power of investments‘, Japan came to be trapped in a long-term and seemingly endless economic recession and complicated domestic institutional crisis. Although Japan continues to take the role of the leading goose, Japan must face the reality of lacking capabilities to perpetuate its leading role. According to the Ministry of International Trade and Industry (MITI, Japan), the era of Japan as lead goose has ended, while East Asia enters into an era of immense competition (MITI 2001).
Based on vast size of its market and unbalanced development levels within its internal boundaries, China is capable of developing cooperation with its neighbours that lie at different layers both horizontally and vertically (Gaulier, Lemoine et al. 2007). Meanwhile, cooperation can be established either in terms of an entire economy or a specific industry. The rise of China creates rivalry among countries for global market share, as East Asian countries still heavily depend on exports. However, China also imports to a significant degree from other East Asian countries, which is believed to contribute to the East Asian intra-regional trade and cooperation and more details which will be shown in Chapter Three. Apart from the overseas Chinese networks that have been believed to have contributed to the development of EARPNs (Katzenstein and Shiraishi 2006), indigenous Chinese enterprises are also reputed to have growing power that contributes to the ongoing changing EARPNs, which will be discussed in more details in Chapter Four. Therefore, China‘s astonishing performances based on such realities have led academics to draw the conclusion that China has already taken Japan‘s leading position in the EARPNs (Xing 2007). However, bearing in mind the elaboration
in Chapter One, the discussion in the following chapters of this thesis will show that it is premature to come to this conclusion at the moment.
3 Key Factors Influencing ICT and China
Internet access, PC and telephone ownership have expanded so rapidly in a very short term, because a large amount of money had been invested in ICT expenditure to boost demands for ICT equipment, software and ICT and e-commerce services (Vaile 2002). All these changes are deeply and directly related to government support, gradually improving regional and domestic regimes and legal environments, reducing equipment tariffs, and increasing FDI (Vaile 2002). To be brief, both internal and the external factors have had a significant influence on the astonishing achievements of the ICT industry made by East Asia. In other words, domestic government support with regard to the continuous improvements over relevant policies and regimes and foreign investments brought by overseas MNCs make the profound changes in the ICT industry possible. The general frameworks for this support will be examined here, with reference to the whole region. The particular role of the Chinese government will be examined fully in Chapter Three.
As mentioned in the previous section, ICT is believed to be the fastest growing technology that will bring a promising future to national economies either through production or consumption (Kraemer and Dedrick 1996a). In view of that, according to Kraemer and Dedrick, almost every country in the world has been trying to enhance its development of the ICT industry, with the aim of strengthening its economy through the production and the use of ICT (Kraemer and Dedrick 1996b). Under these
circumstances, national policies for development strategies are crucial for the developmental trajectory of the ICT industry. In other words, relevant policies and strategies have already been proved to be very effective in terms of protecting the ICT industry from fierce competition and accelerating it into further development,
particularly policies on innovation promotion that will deeply enhance the power of the ICT industry (Kitagawa 2005). For example, the Clinton government in the US clearly announced ICT policies to enhance the establishment of the ‗ICT Highway‘ in 1992 and the plan for National Information Infrastructure (NII) was carried out in 1993. These plans were important in promoting the economic development of the US and the all-round development of the information economy in the world (NIST 1994). In sum, industrial support for the ICT industry from government level holds an incomparable position in terms of industrial protection and promotion. However, because of the differences in innovation conditions in each country, certain policies might produce varying results in different countries with varying degrees of effectiveness.
ICT, according to Sein and Harindranath, amongst others, can be grouped into different categories: as a commodity; supporting development activities; as a driver of the economy; and directed at specific developmental activities (Sein and Harindranath 2004). In the first category, the conceptualisation of ICT as a commodity enables it to be considered as a production factor that has great impacts on the skill and productivity of labour (Mody and Dahlman 1992). On the one hand, as a production factor, ICT can help in attracting more FDI inflows because it may contribute to the improvement of an advanced infrastructure and lower production costs. On the other hand, as a production factor, it is also necessary for governments to make great efforts with regard to trade promotion to strengthen the comparative advantage of their country. This explains why
developing countries have changed their attitude and shifted from controlling high tariffs and containing FDI to encouraging export-oriented trade and the inflow of foreign investment (Gholami, Lee et al. 2006).
As ICT can lower transaction and production costs, ICT to a large extent increases the inflows of FDI to developing countries. In the meantime, the development of the ICT industry has also been deeply enhanced because of those FDI flows. Addison and Heshmati have proved that developing countries can gain opportunities, including exports promotion, capital accumulation, access to much larger markets, and skill and